CHAP 8

58. Which one of the following statements is NOT true? a. The relationship between yield and marketability is known as the term structure of interest rates. b. The shape of the yield curve is not constant over time. c. As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes. d. Yield curves show graphically how market yields vary as term to maturity changes.

a

60. Which ONE of the following statements is true? a. The longer the maturity of a security, the greater its interest rate risk. b. If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. c. The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. d. The interest risk premium always adds a downward bias to the slope of the yield curve.

a

59. The three economic factors that determine the shape of the yield curve are a. the real rate of interest, the expected rate of inflation, and marketability. b. the real rate of interest, the expected rate of inflation, and interest rate risk. c. the nominal rate of interest, the expected rate of inflation, and interest rate risk. d. the real rate of interest, the nominal rate of interest, and interest rate risk.

b

. With semistrong-form market efficiency, a. the price of a security in the market reflects all public information only. b. it would be possible to earn abnormally high returns by trading on public information. c. investors who have access to inside or private information will be unable to earn abnormal returns. d. None of the above.

a

44. If a bond's coupon rate is equal to the market rate, then the bond will sell a. at a price equal to its face value. b. at a price greater than its face value. c. at a price less than its face value. d. None of the above are true.

a

46. Bonds sell at a premium over the par value when market rates for similar bonds are a. less than the bond's coupon rate. b. greater than the bond's coupon rate. c. equal to the bond's coupon rate. d. Market rates are irrelevant in determining a bond's price.

a

54. Marketability is the ability of an investor a. to sell a security quickly, at a low transaction cost, and at a price close to its fair market value. b. to sell at a profit under all circumstances. c. to sell the security above its par value. d. None of the above.

a

Which one of the following statements is NOT true? a. The overall efficiency of a capital market depends on its operational efficiency and its informational efficiency. b. Operational efficiency focuses on bringing buyers and sellers together at the lowest possible cost. c. If market prices reflect all relevant information about securities at a particular point in time, the market is operationally efficient. d. All of the above are true.

c

37. Which ONE of the following statements is true? a. The largest investors in corporate bonds are life insurance companies and pension funds. b. The market for corporate bonds is thin. c. Prices in the corporate bond market also tend to be more volatile. d. All of the above are true.

d

39. It is easy for individuals to trade in the corporate bond market because a. the corporate bond market is considered to be very transparent. b. prices in the corporate bond market tend to be more stable. c. centralized reporting of deals between buyers and sellers take place. d. None of the above statements are true.

d

42. Which ONE of the following statements is true? a. To secure the conversion option on a bond, bondholders would be willing to pay a premium. b. The conversion ratio is set so that the firm's stock price must appreciate 15 to 20 percent before it is profitable to convert bonds into equity. c. Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. d. All of the above are true.

d

47. In calculating the current price of a bond paying semiannual coupons, one needs to a. use double the number of payments. b. use half the annual coupon. c. use half the annual rate as the discount rate. d. All of the above need to be done.

d

34. With strong-form market efficiency, a. the price of a security in the market reflects all public information only. b. it would not be possible to earn abnormally high returns by trading on private information. c. investors who have access to inside or private information will be able to earn abnormal returns. d. None of the above.

b

38. Which one of the following statements is NOT true? a. Prices in the corporate bond market also tend to be more volatile than the markets for stocks or money market securities. b. Corporate bonds are more marketable than the securities that have higher daily trading volumes. c. The market for corporate bonds is thin. d. The largest investors in corporate bonds are life insurance companies and pension funds.

b

43. Which one of the following statements about bond price is NOT true? a. To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows. b. The value, or price, of any asset is the future value of its cash flows. c. The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity d. Estimate the expected future cash flows using the coupons that the bond will pay and the maturity value to be received.

b

45. Bonds sell at a discount off the par value when market rates for similar bonds are a. less than the bond's coupon rate. b. greater than the bond's coupon rate. c. equal to the bond's coupon rate. d. Market rates are irrelevant in determining a bond's price.

b

53. Which ONE of the following statements is true? a. Long-term bonds have lower price volatility than short-term bonds. b. As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. c. All other things being equal, short-term bonds are more risky than long-term bonds. d. Interest rate risk decreases as maturity increases.

b

56. Which one of the following statements is NOT true? a. The risk that the lender may not receive payments as promised is called default risk. b. Investors must pay a premium to purchase a security that exposes them to default risk. c. U.S. Treasury securities do not have any default risk and are the best proxy measure for the risk-free rate. d. All of the above are true statements.

b

36. Which one of the following statements is NOT true? a. Weak-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. b. Semistrong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. c. Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. d. None of the above.

c

40. Which one of the following statements about vanilla bonds is NOT true? a. They have no special provisions. b. The face value, or par value, for most corporate bonds is $1,000. c. Coupon payments are usually made quarterly. d. The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value.

c

48. Which one of the following statements about zero coupon bonds is NOT true? a. Zero coupon bonds have no coupon payments but promise a single payment at maturity. b. Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. c. Zero coupon bonds make coupon payments but no principal payment at maturity. d. All of the above statements are true.

c

50. The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments a. exceed the price of the bond. b. equal to zero. c. equal to the price of the bond. d. less than the price of the bond

c

52. Which one of the following statements is NOT true? a. Interest rate risk is the risk that bond prices will change as interest rates change. b. Interest rate changes and bond prices are inversely related. c. As interest rates increase, bond prices increase. d. Long-term bonds are more price volatile than short-term bonds of similar risk.

c

57. Inverted yield curves are observed when a. the economy is growing. b. the economy is stagnant. c. the economy is in recession. d. None of the above.

c

Which one of the following statements is NOT true? a. Competition among investors is an important driver of informational efficiency. b. If market prices reflect all relevant information about securities at a particular point in time, the market is informationally efficient. c. In an informationally efficient market, market prices adjust quickly to new information about a security as it becomes available. d. All of the above are true.

d

49. Which one of the following statements is NOT true? a. The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. b. It is the yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. c. A bond's yield to maturity changes daily as interest rates increase or decrease. d. All of the above are true.

d

51. Which one of the following statements is NOT true? a. The realized yield is the return earned on a bond given the cash flows actually received by the investor. b. The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity. c. It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond. d. Both b and c are NOT true

d

55. Which ONE of the following statements is true? a. The lower the transaction costs are, the greater a security's marketability. b. The interest rate, or yield, on a security varies inversely with its degree of marketability. c. U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities. d. All of the above are true.

d

In an efficient capital market, a. security prices fully reflect the knowledge and expectations of all investors at a particular point in time. b. investors and financial managers have no reason to believe the securities are not priced at or near their true value. c. prices of securities adjust as new information becomes available to the market. d. All of the above are true.

d

Which ONE of the following statements is true? a. Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. b. Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. c. The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. d. All of the above are true.

d